GBP/USD volatility likely to return, with the BoE kicking off key period
Sterling has been in consolidation mode as traders react to the electoral uncertainty ahead. With the economic calendar packed, GBP/USD volatility looks likely to come from a different angle.
PMI rebound fails to lift the pound
The pound has been in a holding pattern over the past week, with traders unable to truly act with conviction given the huge political and economic uncertainty that lies ahead. The past three trading days have brought about greater clarity over the current trajectory of UK business, with purchasing managers index (PMI) surveys from manufacturing, construction and services.
By and large those leading economic indicators have provided us with an improved outlook, with gains across the board for the month of October. However, there are some caveats worth noting here. Firstly, the manufacturing sector received a sharp boost last month thanks to stockpiling which has been evident in the month leading up to each previous Brexit deadline. The extension to that 31 October deadline for Article 50 to run out ultimately averted a no-deal Brexit.
However, foreign businesses have been forced into stockpiling UK products and inputs ahead of each Brexit deadline. With that in mind, it is likely that this boost is reversed in the forthcoming months, negating much of the current resurgence.
Elsewhere, while we have seen improvements in the construction and services number, one remains well in contraction territory, while the other has only just about managed to claw itself back to neutral with a reading of 50.
Bank of England shifts focus to inflation report estimates
Next up we see the Bank of England (BoE) provide their latest rate decision, which is accompanied by the inflation report. With both election and Brexit uncertainty looming large, there is little to point towards any shift in policy from the monetary policy committee (MPC). However, markets will seek further clarity on what the bank plans to do in the event of each outcome. It is highly like that a no-deal Brexit would bring about a subsequent rate cut. However, the action in the event of UK Prime Minister Boris Johnson’s deal remains less clear.
Also keep an eye out for the latest estimates from the BoE, with growth and inflation estimates likely to be crucial in reflecting where the committee sees the economy moving in the years ahead. Certainly, the subject of growth will remain relevant for the week ahead, with Thursday’s BoE estimates being followed up by the actual third-quarter (Q3) preliminary gross domestic product (GDP) reading on Monday. That comes alongside the monthly figure for September.
With political uncertainty remaining a key figure for traders, we are likely to see GBP sentiment driven more by economic concerns for the time being. With that in mind, traders will be keenly watching the data deluge coming out of the UK next week. Monday sees industrial and manufacturing production alongside those GDP figures.
Tuesday brings the latest jobs report, following an eight-month low for the claimant count. On Wednesday we see inflation, amid a decline that has seen consumer price index (CPI) drift into a two-year low of 1.7%. And finally, Thursday highlights the actions of UK consumers, with the retail sales figures grabbing the headlines ahead of an important festive period for the high street.
Sterling awaiting breakout from recent consolidation
GBP/USD has largely been in consolidation mode over the past three weeks, with neither selling nor buying pressure managing to really take shape in any meaningful way. With the pair currently trading in a more bearish trajectory, there is a strong chance that we will see further downside if $1.2876 is broken. For the wider picture to resolve, we would need to see a break through either $1.3012 or $1.2788 levels. Until then, traders will have to remain flexible to react to any significant shifts in the economic and monetary policy picture.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Start trading forex today
Trade the largest and most volatile financial market in the world.
- Spreads start at just 0.6 points on EUR/USD
- Analyse market movements with our essential selection of charts
- Speculate from a range of platforms, including on mobile
Live prices on most popular markets